Intervention by the Reserve Bank of India safeguards Indian rupee from touching a new low following Trump's tariff warning.
The US-India trade tensions in 2022 and beyond have led to a significant depreciation of the Indian Rupee (INR) against the US Dollar (USD), causing concern for investors and economists alike.
The USD/INR exchange rate has risen, with the Rupee weakening substantially against the Dollar. The Rupee depreciated nearly 3% in a recent five-week span and fell sharply on news of tariff increases by the US.
The imposition of hefty tariffs, initially 25% and later increased to 50%, following India's decision to continue purchasing Russian oil has triggered concerns about competitiveness in Indian export sectors such as textiles, pharmaceuticals, and gems and jewellery. This further pressured the Rupee and Indian export revenues against the Dollar.
The Reserve Bank of India (RBI) has responded by intervening almost daily in the foreign exchange market to curb Rupee depreciation and contain volatility, partially limiting the damage. However, foreign capital outflows have exacerbated Rupee weakness, with consistent selling of Indian equities by Foreign Institutional Investors (FIIs) amid rising trade tensions.
Despite trade tensions, the RBI has maintained a neutral stance on monetary policy and kept GDP growth projections stable at 6.5%, indicating an expectation that the broader economic fundamentals could absorb the tariff shocks.
The US Dollar showed mixed behavior related to global trends such as Federal Reserve policy, but trade tensions have heightened the demand for dollars versus the Rupee due to risk aversion and capital outflows from India.
In response to the trade tensions, India's foreign ministry has said it would take "all necessary steps" to protect national interests and economic security. The RBI has also capped lenders' investments in alternative investment funds at 20%. The RBI's interest rate decision on Wednesday could influence the currency's trajectory.
The rupee has slipped for the second straight week, with the dollar perking up and foreign outflows being a factor. Trump's tariffs are causing rattles in the Indian rupee and stocks, potentially clouding the growth outlook. The Philippine peso dropped 0.6% after inflation hit the lowest in nearly six years, which may accelerate foreign outflows, putting further strain on the rupee if talks stall.
As of 1007 GMT, the dollar index is down 0.3% at 98.967. The rupee stands at a crossroads amid rising geopolitical tensions and fears of more expensive crude oil, with the Indian rupee-dollar relationship marked by broader risk-off dynamics but centered significantly on tariff-related trade friction and policy responses.
- The depreciation of the Indian Rupee against the US Dollar, as a result of US-India trade tensions, has caused concern for both investors and economists.
- Foreign Institutional Investors (FIIs) have been consistently selling Indian equities amid rising trade tensions, leading to foreign capital outflows and further weakening of the Rupee.
- The Reserve Bank of India (RBI) has implemented measures to curb Rupee depreciation and contain volatility, such as daily intervention in the foreign exchange market and capping lenders' investments in alternative investment funds.
- Beyond trade tensions, broader geopolitical risks, such as rising geopolitical tensions and fears of more expensive crude oil, are also putting strain on the Indian rupee-dollar relationship, creating a complex interplay of factors affecting the currency's trajectory.
